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March 14, 2013

Stress Levels Down, but So Is Wellness: Financial Finesse

Employees struggled with cash management in 2012

Financial Finesse released on Thursday its annual Year in Review report on employee financial wellness in 2012. The firm found employees struggled through the early part of the year, and while they recovered some, they still didn’t finish as well off as they did in 2011.

The biggest issue for employees in 2012 was cash management. Over two-thirds of employees said they were managing their cash flow well, but that was down from 72% in 2011 and 64% in 2010. The percentage of employees who had an emergency cash fund also fell to 51% from 56% in 2011.

Greg Ward (left), director of Financial Finesse’s think tank, suggested employees’ struggle with cash management was due to their growing optimism in regards to investment performance and the unemployment rate. “Some headlines make it look like things are getting better,” Ward told AdvisorOne on Thursday. “Some employees may be thinking, ‘If everything else is getting better, my situation must be getting better, too.”

A closer look at employees’ behaviors shows that’s not the case. In addition to half of employees who don’t have an emergency fund, a “significant number” don’t always pay their bills on time or regularly pay off their credit card debt.

In addition to declines in cash management, more employees took hardship withdrawals in 2012, the report found, up to nearly a third from 25% in 2011. Ward said that some employees may be more reluctant to borrow from traditional sources like home equity or credit cards, so they’ve turned to their 401(k)s.

In spite of those negative outcomes, employees say they are managing their financial stress well and are even focusing on long-term planning goals like saving for retirement. After a significant drop in the number of employees who reported high or overwhelming stress in 2010 and 2011, the percentage continued to fall to 18% of employees in 2012. The report noted that a falling unemployment rate, which fell from 8.3% in January 2012 to 7.8% in December, and an extended bull market were likely the cause for employees’ reduced stress level.

Ward said that the No. 1 source of financial stress was uncertainty over the U.S. economy. “Uncertainty is always a big factor,” he said, “but when you have a declining market, and a bad housing market, bad financial behaviors, all that negative news leads to increases in levels of overwhelming stress.” When employees are suffering uncertainty but have the reassurance of an emergency cash fund and stability in the job market, they don’t feel as stressed.

The report noted, though, that even though stress levels are falling, they’re still high, with 64% of employees reporting some level of stress. Furthermore, despite the drop in stress levels, financial wellness fell from a score of 5.2 in 2011 to 5 in 2012.

“Are people getting lulled into complacency?” Ward asked. Prior to 2008, he said, people were comfortable with their employment situation, financial behaviors and the housing market. “We hope they’re not slipping into the same behaviors.”

Calls made to Financial Finesse’s hotline were focused on retirement planning, though the report notes tax questions doubled to 14%. The only other topic to receive increased attention was real estate, which only accounted for 6% of calls. Interest in cash and debt management and investing fell. The report noted that this drop was “typical of what happens when there is an extended bull market, and a subsequent increase in consumer confidence.”

More than 90% of employees said they contributed to their workplace retirement plan, but just 17% said they are on track to replace at least 80% of their income.

Financial Finesse didn’t survey respondents on whether they participated in the plan because they were automatically enrolled in it, but Ward said that the 17% of people who aren’t sure if they are on track for retirement have more in common with the people who knew they were definitely not on track for retirement than with those who knew for a fact that they were.

Employees shouldn’t focus so much on long-term planning that they lose sight of their short-term needs, Ward said. “We’d rather see employees say they want to get an emergency fund, live in their means and pay off debt so that they can focus on long-term planning issues like retirement and paying for education.”